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The Rut We Can’t Get Out Of

THE Federal Reserve confounded the bond markets last month by clinging to its easy-money policies. The federal government has shut down today because of an impasse over the budget. And in two weeks, the nation is set to hit its borrowing limit.

These are the headlines, and they’re dire, but they’re in fact a sideshow compared with the real problems afflicting our economy. We are in an age of global oversupply: an oversupply of global labor (hence high underemployment); an oversupply of global productive capacity (hence ultra-low inflation); and an oversupply of global capital (hence low interest rates).

This explains why, around the middle of each of the past three years, activity petered out after predictions earlier in the year that the economy would finally achieve escape velocity.

The jobs created have been mainly low wage and part time. Growth in domestic manufacturing is still slow, and business spending has fallen, though corporations are flush with profits. Debt-saddled households continue to see real incomes deteriorate (even with very low inflation). Sales of new homes have suddenly reversed course. Rents are falling in several markets where home prices have recently increased. Even the seemingly unflappable stock market has been seesawing because of the uncertain economic signals.

Why do we seem unable to get out of this rut? In short, our policy makers are still fighting the last war. We are no longer faced with a world in which supply-side economic remedies — easy money, reduced taxation, fiscal belt-tightening and deregulation — can spur new capacity and the creation of well-paying private sector jobs.

A “reverse supply shock” that resulted from the sudden emergence, especially in the 1990s, of the productive potential of enormous, previously walled-off populations from Eastern Europe to Latin America to East and South Asia, helped fuel successive bubbles.

Hundreds of millions of people who once lived in sleepy or sclerotic statist and socialist economies now compete directly or indirectly with workers in the United States, Europe and Japan, in a world bound by lightning-fast communications and transportation. Countries that were recently poor (and still are, on a per-capita basis) find themselves with huge surpluses and sovereign wealth funds. The rich countries of the world, while still rich, struggle with monumental levels of debt, both private and public, and unsettling questions about whether they can compete globally.

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Beginning in the late 1990s, a wave of capital, much of it the result of trade surpluses and big piles of savings in Asia, flooded the world’s capital markets. But consideration of global imbalances has taken a back seat in domestic policy circles. The causes of the crisis, it is often said in New York and Washington, lay mainly in too much risk-taking by the lords of finance, along with too big an appetite for debt among ordinary people.

But one can’t properly understand the financial crisis without appreciating how the rise of the emerging nations distorted the economies of rich countries. And you can’t chart a course to more growth and stability in the developed world without recognizing that many of these distorting forces are still at work. Cheaper credit through monetary easing, for example, doesn’t yield much in an era when cheap capital already exists in abundance.

Can we get out of this mess? We can, but we need a fresh playbook.

Developed nations need to put the huge surplus of underemployed workers back to work by any means, including big public sector investments to improve infrastructure and competitiveness. We need a new economic multilateralism with the developing world, to encourage them to rebalance their economics away from savings and toward consumption, while we in the West must curb our addiction to credit and consumption (and in doing so reverse the trends of income and wealth polarization).

Financial institutions that engage in speculation instead of capital formation create waste that we can no longer afford. Health care and higher education, fields known for both excellence and waste, and giant discrepancies in quality, must yield to more cost-effective approaches (and become more accessible).

Above all, we must end the ideological gridlock that stands in the way of renewed prosperity. Frenzied, supply-side insistence on allowing markets to work matters out, and diatribes against government-led economic activities may please right-wing political constituencies. But simply ignoring the earnest fortitude of billions of new global workers is no way for this nation to stay rich and competitive.

This Op-Ed article has been updated to reflect news developments.

Daniel Alpert, founding managing partner of the investment bank Westwood Capital and a fellow at the Century Foundation, is the author of “The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy.”

A version of this op-ed appears in print on October 1, 2013, on Page A25 of the New York edition with the headline: The Rut We Can’t Get Out Of. Today's Paper|Subscribe